Market-based Compliance Mechanism

A market-based compliance mechanism is an environmental policy tool that uses economic incentives to encourage companies to reduce pollution. Instead of direct regulations, it sets a cap on total emissions and distributes or auctions permits that allow a certain amount of pollution. Companies can buy, sell, or trade these permits, creating a financial motivation to cut emissions. If a company reduces pollution more than required, it can sell excess permits for profit. This system promotes cost-effective pollution control, balancing environmental goals with market dynamics to achieve overall emission reductions efficiently.